Revival on the regional office markets (PL)

Following a marked slowdown, optimism is returning to the regional office markets in Poland. Prime office rents have stabilized and office take-up is recovering.

Q1-Q3 2010 saw an upward trend in new office supply with around 160,000 m&#178; entering the market in the major office markets (excluding Warsaw). According to the latest Jones Lang LaSalle's forecasts, a total of 55,000 m&#178; is due for delivery in Q4 2010 in major regional markets (for the whole 2010 a level comparable to 2009 with around 227,000 m&#178; coming to the market).

The initiation of the construction works of the numerous office developments planned for completion in 2012, such as Bonarka 4 Bussines, Quarto II and Jasnogórska 11 in Krakow, Baltyckie Centrum Biznesu, Olivia Business Centre and Twin Wave in Tri-City or Green Towers in Wroclaw suggests developers' confidence is returning. This is underpinned by a steady recovery on the demand side of the market from corporate occupiers.

Around 300,000 m&#178; of office space remain in construction stages across Poland (excluding projects currently on hold), the majority of which is in Kraków, Wroclaw and Lódz. In the latter, the office space under construction is equal to around 40% of office space supply on the local market, the highest proportion out of all the Polish cities.

New locations emerge on the Polish office map. In the third tier cities such as Szczecin, Lublin, Rzeszów, Bydgoszcz, Torun, Olsztyn, Bialystok, Kielce around 30,000 m&#178; is vacant. Another 50,000 m&#178; will enter the markets up until H2 2011.

Recent evidence in the regional office markets suggests that a recovery in corporate demand is underway with new requirements beginning to surface. As of the end of Q3 2010 vacancy rates remained stable in Krakow, Wroclaw and Poznan (averaging 0.7%, 3.2% and 8% vs. 11.4%, 3.4% and 8.8% in Q2 2010, respectively), while slight downward pressures were registered in Lodz and Katowice (around 20% and 17% respectively). Tri-City is an exception to this with a vacancy rate at 11% in Q3 2010, up from 9.7% in Q4 2009. The increase resulted from a delivery of new office buildings, and their commercialization was affected by weakening demand since H2 2008. With economic indicators beginning to be broadly positive there is increasing confidence that this recovery trend will continue.

Prime headline rents currently range from 11-13.5/m&#178;/month in Lodz, to 15/m&#178;/month in Krakow and Poznan. We expect prime headline rents to remain stable in Q4 2010, with upward pressure on the headline rents in 2011 in most regional markets.